It’s a question on the mind of many entrepreneurs. Namely, ‘how can I make my business attractive to potential acquirers?’

People start businesses for lots of reasons. Many don’t even consider their exit strategy initially, although this is something they should give thought to from day one. Since most exits are through acquisition, it makes sense to keep that possibility in mind and make sure that in the course of building your business, you avoid obvious moves that would discourage potential buyers.

What makes a business attractive to acquirers?

1. The right market

You want to pick one that has significant growth prospects — enough to have attracted competitors as well as potential entrants. And don’t think a market is not attractive just because you have competition. It’s extremely unlikely to find a wide open market. If you come across one, chances are that no one’s playing there for a reason: i.e., it has limited potential. The thing you want to be sure of is that the market you choose isn’t overly crowded with large entrenched competitors who could easily outmaneuver you or who will force you to burn lots of cash trying to take them on.

2. Assemble a solid team

This can be hard to do when you’re just starting up and have limited track record and even less cash. But this can be the difference between getting funded or not. Many investors view the startup team, who’s on it and their track records, as the number one or number two factor on their list of funding criteria.

Other than your cofounder(s) if any, developers, and other strategic talent, you should outsource as much as you can for as long as you can. As you develop revenue traction and start to see cash coming in, you’ll have a better chance of attracting the right talent. And you might also catch the eye of a potential acquirer.

3. Focus on execution

This should be obvious, but be good at what you do. That means your business addresses a key pain point, with a unique and clear value proposition and that you are successfully laying out and hitting your milestones in terms of customer numbers, market share, and churn, and this shows in your key numbers.

4. Run a tight financial ship

Your accounting records should be in order: that means accrual based, in accordance with generally accepted accounting principles (GAAP). Your corporate governance, legal records, You’ll be way ahead of the vast majority of startups by getting all your HR and employee documentation organized and in a format that’s easily shareable.

5. Keep your capital structure clean

It’s impossible to see into the future. Allocate and document how founders’ shares will be split when you first incorporate, and have a lawyer draft a founders’ agreement spelling out what would happen in a sale, founder exit, or other scenario.

Avoid taking on lots of small investors or creating too many different classes of stock.   It’s a nightmare to sort out and could really limit you when you go to raise funds, sell your business, or even make an acquisition.

6. Protect your IP

If technology’s your key differentiator, make sure you have a plan, and you you follow it, for safeguarding yours. That means clear documentation and registering your IP, among other things.

Following these steps is no guarantee that acquirers will beat a path to your door, but it will help you build a sound and successful business: which should be your primary focus. Planning for an exit is hugely important but being an entrepreneur is about so much more than that. It’s about vision, backed up with a sound plan, and a commitment to see it through. It’s just too tough and risky to do without having real passion, belief in yourself, in the business you’re building, and in the market you’re serving.

 

Guest blogger David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.